FR 2021-00816

Summary of the Document

The Federal Register document outlines proposed changes by Cboe Exchange, Inc. to its fee schedule, specifically targeting expiring fee waivers and incentive programs. The proposal made effective on January 4, 2021, aims to amend incentives for market makers, known as Lead Market Makers (LMMs), in index options like the MSCI EAFE (MXEA) and MSCI Emerging Markets (MXEF), and also to enhance incentives for quoting in the S&P 500 (SPX) options during Global Trading Hours (GTH). Furthermore, the Cboe Exchange is looking to remove incentives tied to the FTSE 100 Mini Index (UKXM) options, which have expired. The adjustments are intended to encourage liquidity and active market engagement, which are claimed to benefit overall market quality and participation.

Significant Issues or Concerns

One of the key issues with the document is the complexity of the financial jargon, which could make the information difficult to access and understand for those without a background in finance or the options market. This lack of accessibility might prevent a broader audience from fully engaging with the content and comprehending its implications.

Additionally, the proposal offers significant financial incentives to specific market entities, namely the LMMs, which raises concerns about the equity of such reward systems. By focusing benefits primarily on LMMs, the program may inadvertently exclude other market participants from similar opportunities.

Moreover, the document alludes to the removal of the UKXM DPM incentive program but does not provide adequate context to clarify the reasons behind its expiration or the potential consequences for those who may have been reliant on or influenced by this program in the past.

Impact on the Public

For the general public, the changes proposed by the Cboe Exchange, Inc. have indirect implications. While most retail investors might not engage directly with such index options, the impact on liquidity and market stability could affect broader market trends and trading environments. Tighter spreads and increased liquidity, as aimed by these changes, supposedly manifest in more efficient market conditions, which ideally benefit all traders by reducing transaction costs and enhancing price transparency.

Impact on Specific Stakeholders

For stakeholders involved directly in the market, particularly those categorized as LMMs, the proposed changes present obvious benefits in the form of increased financial incentives. Successful LMMs might find themselves more motivated to enhance their market-making activities, contributing to the deeper and more liquid markets the Exchange aims to create.

On the other hand, smaller market participants or entities not classified as LMMs might perceive these rule changes differently. Since fulfilling the tightened quoting standards and accessing incentives could be more challenging for smaller players without the resources to meet the required benchmarks, this disparity could potentially widen the competitive gap. Consequently, such participants might find themselves at a disadvantage unless additional measures or programs are introduced to level the playing field.

Overall, while the amendments aim to fortify market dynamics, the nuanced implications for different stakeholders highlight the importance of understanding the practical outcomes of such regulatory proposals.

The document outlines proposed changes to the fee structures and incentive programs offered by the Cboe Exchange, Inc., focusing on several financial allocations made to certain market participants, particularly Lead Market Makers (LMMs) and Designated Primary Market Makers (DPMs).

Summary of Financial Allocations

1. Monthly Payments to LMMs: The Cboe Exchange proposes a continued payment of $20,000 per month for each class (i.e., MSCI EAFE Index (MXEA) options and MSCI Emerging Markets Index (MXEF) options) to appointed LMMs who meet specific heightened quoting standards. This indicates a significant financial commitment by the exchange to promote liquidity through incentivizing LMMs.

2. Adjusted Quoting Standards and Associated Payments: The document details proposed changes to the quoting standards, adjusting width requirements for options quotes. For example, widths for MXEA and MXEF options are proposed to change to a $1.20 width for a size of 20 contracts, down from $1.50, reflecting an effort to tighten the market spreads, which can lead to more competitive pricing.

3. Increased Incentive Payments for SPX/SPXW: The rebate amounts for LMMs under the Global Trading Hours (GTH) SPX and SPX Weekly (SPXW) Incentive Programs are proposed to increase to $20,000 for SPX and $30,000 for SPXW. Previously, these figures were $10,000 each, thus doubling and tripling the incentive, respectively. This increase is positioned to encourage greater participation and liquid markets during these trading hours.

4. Expiration of UKXM DPM Incentive Program: The document notes the expiration of the UKXM DPM incentive program, which provided a $5,000 payment per month until December 31, 2020. This removal seems to adjust the focus away from UKXM incentives following their expiration.

Relation to Identified Issues

The financial incentives discussed align with several identified issues:

• Complex Financial Jargon: The document uses specialized terminology while discussing these financial allocations, which may be difficult for the general public to fully understand. Terms like "quoting standards" and "rebate amounts" tie directly into the financial specifics detailed in the document, heightening the potential need for clarity.

• Fairness and Accessibility: The allocation of these substantial payments and incentives primarily to LMMs might raise concerns about equity, as not all market participants may have equal opportunities to qualify for these incentives. Smaller market participants might struggle to meet the heightened quoting standards needed to receive such benefits, potentially reinforcing existing market hierarchies.

• Justification for Benefits of Tighter Spreads: Although the document claims tighter spreads and enhanced liquidity as universally beneficial outcomes, there is limited evidence provided to substantiate these claims thoroughly. The increased rebates seem to imply these benefits will ensue; however, without a detailed justification, these claims might appear as assumptions.

In summary, the financial references in the document suggest a targeted strategy by Cboe Exchange, Inc. to enhance market liquidity and trading activity through structured incentives. However, the equity and accessibility of these incentives, particularly for smaller market participants, remain potential concerns, alongside the necessity for clear communication due to the complexity of financial jargon involved.